How does Illinois tax a construction contractor who also manufactures the modular components it installs into a building?

Plain-English summary

The Illinois Department of Revenue answered a question about a company that manufactures modular building components (in this case, cantilevered signage/facade structures for car dealerships) and then has them installed as part of a construction contract. The company asked whether its modular components should be treated as tangible personal property or as real property once installed, and how sales and use tax applies to the sale, installation, repair, and freight of those components.

The Department explained that the key question is whether the modular components are permanently affixed to real estate. A contract that provides for both the sale and installation of tangible personal property that gets permanently affixed or incorporated into a structure is a construction contract, and construction contractors -- including general contractors, subcontractors, and specialized contractors -- are treated in Illinois as the end users of the materials they incorporate into real property. As end users, they owe Use Tax based on their cost price for that property, not Retailers' Occupation (sales) Tax, and they have no legal authority to collect tax from their customers.

The letter's specific holding addresses a further wrinkle: when the construction contractor is also the manufacturer of the finished component it installs, the tax base is not the price the contractor would otherwise charge for the finished, installed component -- it's simply what the contractor paid for the raw materials that went into manufacturing that component (86 Ill. Adm. Code 130.2075(a)(2)). The letter also covers related mechanics: contractors that didn't pay Use Tax to their suppliers must self-assess and remit it directly to the Department; contractors get credit for tax properly paid to another state; separately stating labor and materials on a bill doesn't change the construction-contract tax treatment; and delivery/freight charges aren't taxed because the contractor isn't acting as a retailer of tangible personal property.

Because this is a General Information Letter (GIL) rather than a Private Letter Ruling (PLR), the Department did not rule on the taxpayer's specific facts (whether its particular product is "real property" versus "tangible personal property"). Instead, it pointed the taxpayer to the general regulatory framework in 86 Ill. Adm. Code 130.1940 and 130.2075 that governs construction contractors, leaving the ultimate factual characterization to the taxpayer to apply.

What this means for you

Construction contractors and manufacturer-installers

If your business both manufactures components and installs them as part of a construction contract (i.e., they get permanently affixed to a building), you're generally treated as the end user of the materials for Illinois tax purposes, not as a retailer selling to your customer. That means you owe Use Tax on the materials, calculated on your cost for the raw materials, not on what you'd otherwise bill a customer for the finished, installed product. If you haven't already paid Use Tax to a supplier on those materials, you need to self-assess and remit it directly to the Department. You also cannot bill your customer "sales tax" on these jobs, though you can build the cost into your price or add a contractual "tax reimbursement" line item.

General contractors and subcontractors

The letter also clarifies the general contractor/subcontractor chain: if a subcontractor buys the materials and installs them, the subcontractor (not the general contractor) owes the Use Tax. But if the general contractor buys the materials and simply hires a subcontractor to do the installation, the Use Tax liability shifts to the general contractor as the actual purchaser. Sales between a general contractor and subcontractor acting as construction contractors are not themselves taxable transactions.

Accountants and tax professionals advising these clients

Watch for the distinction between a true construction contract (tangible personal property permanently affixed or incorporated into a structure, taxed as Use Tax on the contractor's cost) versus a straight retail sale of tangible personal property (taxed as Retailers' Occupation Tax on the sale price). Separately itemizing labor and materials on an invoice does not convert a construction contract into a taxable retail sale. Also note that this GIL does not resolve the underlying "real property vs. tangible personal property" characterization question the taxpayer actually asked -- that determination still has to be made under the facts of each job before you know which tax regime (construction contractor/Use Tax vs. retail/Retailers' Occupation Tax) applies at all.

Common questions

Q: Does a construction contractor charge its customer sales tax on installed materials?
A: No. Construction contractors are end users of the materials they permanently affix to real estate, so their customers owe no Use Tax on those materials, and the contractor has no legal authority to collect sales tax from the customer on that work.

Q: If I manufacture the component I install, what's my tax base?
A: Just what you paid for the materials that went into manufacturing the component -- not the price you'd otherwise charge for the finished, installed item. See 86 Ill. Adm. Code 130.2075(a)(2).

Q: Does separately listing "materials" and "labor" on the bill change the tax treatment?
A: No. A construction contract that separately states installation and materials charges remains a construction contract for sales tax purposes; separate statement alone doesn't convert it into a taxable retail sale.

Q: Who owes the tax when a general contractor hires a subcontractor to install materials?
A: It depends on who buys the materials. If the subcontractor buys and installs, the subcontractor owes the Use Tax. If the general contractor buys the materials and then has the subcontractor install them, the general contractor owes the Use Tax.

Q: Is delivery/freight taxable on a construction contract?
A: No. Because the contractor isn't acting as a retailer of tangible personal property in this context, no tax is due on delivery charges.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax on sellers of tangible personal property)
• 86 Ill. Adm. Code 150.101 (Use Tax on the privilege of using tangible personal property in Illinois)
• 86 Ill. Adm. Code 130.1940 and 130.1940(c) (construction contractors as end users; permanently affixed property)
• 86 Ill. Adm. Code 130.2075 and 130.2075(a)(2) (tax base rules for construction contractors, including contractor-manufacturers)
• 86 Ill. Adm. Code 150.310 (credit for tax properly paid to another state)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2024/ST24-0033-GIL.pdf

Original ruling text

ST 24-0033-GIL 10/15/2024 CONSTRUCTION CONTRACTORS
When a construction contractor is also the manufacturer of modular components
that it will incorporate into real estate, the tax base is the amount such construction
contractor pays for the materials that it incorporates into such components. (See
86 Ill. Adm. Code 130.1940; 86 Ill. Adm. Code 130.2075) (This is a GIL)
October 15, 2024
NAME
COMPANY1
ADDRESS
COUNTRY
Dear Mr. NAME:
This letter is in response to your letter dated July 30, 2024, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings
(“PLRs”) are issued by the Department in response to specific taxpayer inquiries concerning
the application of a tax statute or rule to a particular fact situation. A PLR is binding on the
Department, but only as to the taxpayer who is the subject of the request for ruling and only
to the extent the facts recited in the PLR are correct and complete. Persons seeking PLRs
must comply with the procedures for PLRs found in the Department’s regulations at 2 Ill.
Adm. Code 1200.110. The purpose of a General Information Letter (“GIL”) is to direct
taxpayers to Department regulations or other sources of information regarding the topic
about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
https://tax.illinois.gov/ to review regulations, letter rulings and other types of information
relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
Could you please forward me a private letter ruling on whether 1. PRODUCT
motor dealership would be considered real property or personal tangible
property and 2. Clarification of how taxes are to be applied.
Background
COMPANY1 is the single sourced vendor for the Signage program for
COMPANY2. COMPANY2 launched a new facility design for their Dealerships
in 2024 that will require building new facilities or extensive demolition and
renovation of their dealerships to comply with the DESIGN design iteration.
During COMPANY1 review of the new facilities and new signage designs we

COMPANY1/NAME
Page 2
October 15, 2024
determined that the massive, cantilevered facades of the facilities will have
significant engineering challenges if renovating existing facilities and will
prove to be very difficult for Architects and General Contractors to design and
implement. COMPANY1 has developed a modular system to build this portion
of the facilities in a factory setting. These factory-built structures will integrate
with the onsite construction to yield a completed facility meeting design
specifications.
Relevant Details
The modular components when installed together on site will yield a
completed front façade of the facility. The significant foundations for these
structures are coordinated and unified by the structural engineer for the
facility so that the numerous foundations are part of the new building
foundations and are poured by the GC with COMPANY1 representation on site
to ensure adherence to specifications and full integration. The modular
system is designed to cover and light the car display pedestal areas and the
customer entry. The modular components are integrated with the building
envelope and unify water management from rainwater into a single drainage
system. Similarly, the lighting of the structure is integrated with the interior
lighting systems. The prefabricated building components are flashed with the
building panel systems, the same as site-built components. The modular
structure if ever removed will leave portions of the building unprotected from
the elements no different than removing a wall would do. The remediation
would entail replication of what was removed as it is wholly part of the
building’s design requirements from COMPANY2. COMPANY1 modular
building components are part of the building design. If removed and not
replicated, the remediation would be to put wall structure to accommodate a
paneling system or construction of a new wall. If not modularly built and
installed on site by COMPANY1, they must be site built by the General
Contractor. To be specific, removal will create a deficiency to the remaining
structure causing the need for remedial action. Also the removed structure
would not be in a usable state for another location.
I have attached artwork and technical drawings demonstrating how this
PRODUCT are [sic] manufactured and installed, that may help with the
understanding of what the blue stage are [sic] and whether they [sic] should
be considered real property or personal tangible property.
COMPANY1 is manufacturing this PRODUCT and hiring 3rd party [sic] to install
them for us. We are then invoicing the dealers directly for the supply, freight
and install.

COMPANY1/NAME
Page 3
October 15, 2024
Issues:

1. Whether PRODUCT bolted to a foundation retain its character
   as “tangible personal property” embedded in the ground should
   be [sic] constitute “real property [sic] for Sales & Use Tax
   purposes?
2. What are the State and local sales & use tax consequences of
   the sale, installation, repair and freight of the “PRODUCT” that
   qualifies as tangible personal property to COMPANY1 and its
   customers?
3. What are the State and local sales & use tax consequences of
   the sale, installation, and repair of “PRODUCT” that qualifies as
   real estate to COMPANY1 and its customer?
   DEPARTMENT’S RESPONSE:
   The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged in this
   State in the business of selling tangible personal property to purchasers for use or
   consumption. See 86 Ill. Adm. Code 130.101. The Illinois Use Tax Act is imposed on the
   privilege of using in Illinois, tangible personal property that is purchased anywhere at retail
   from a retailer. See 86 Ill. Adm. Code 150.101.
   The application of these taxes to the business operations described in your letter will
   be determined based on whether the modular components are permanently affixed to real
   estate. The Department’s Administrative Rules pertaining to the taxation of construction
   contractors is relevant to such determination and should provide the necessary guidance.
   A contract that provides for both the sale and installation of tangible personal
   property that is permanently affixed or incorporated into a structure is considered a
   construction contract. The tax liabilities of construction contractors in Illinois can be found
   at 86 Ill. Adm. Code 130.1940 and 130.2075. The term construction contractor includes
   general contractors, subcontractors, and specialized contractors such as landscape
   contractors. In Illinois, construction contractors are deemed end users of tangible personal
   property purchased for incorporation into real property. As end users of such tangible
   personal property, these contractors incur Use Tax liability for such purchases based upon
   their cost price of the tangible personal property. See 86 Ill. Adm. Code 130.1940 and 86 Ill.
   Adm. Code 130.2075. When the construction contractor-installer is also the manufacturer
   of the finished item that it will incorporate into real estate, the tax base is what such
   construction contractor pays for the materials that it incorporates into the finished item.
   See 86 Ill. Adm. Code 130.2075(a)(2).

COMPANY1/NAME
Page 4
October 15, 2024
As discussed in these rules, any tangible personal property that a construction
contractor purchases which will be permanently affixed to or incorporated into real property
in this State will be subject to Use Tax. If such contractor did not pay the Use Tax liability to
its suppliers, the contractor must register and self-assess the Use Tax and make payment
directly to the Department. If the contractors have already paid a tax in another state
regarding the purchase or use of such property, they will be entitled to a credit against their
Illinois Use Tax liability to the extent that they have paid tax that was properly due to another
state. See 86 Ill. Adm. Code 150.310.
It is important to note that since construction contractors are the end users of the
materials that they permanently affix to real estate, their customers incur no Use Tax
liability, and the construction contractors have no legal authority to collect the Use Tax from
their customers. However, a construction contractor may pass on the amount of its Use Tax
liabilities to customers in the form of higher prices or by including provisions in its contracts
that require customers to “reimburse” the construction contractor for such expense. This
reimbursement cannot be billed to a customer as “sales tax,” but can be listed on a bill as
a reimbursement of tax. The choice of whether a construction contractor requires a tax
reimbursement from the customer or merely raises its price is a business decision on the
construction contractor’s part.
Section 130.1940(c) addresses situations where tangible personal property is
permanently affixed or incorporated into a structure incident to a construction contract. As
previously noted, a construction contractor does not incur retailers’ occupation tax liability
as to receipts from labor furnished and tangible personal property (materials and fixtures)
incorporated into a structure as an integral part thereof when furnished and installed
incident to a construction contract. A construction contract that provides for both the sale
and installation of tangible personal property that is permanently affixed or incorporated
into a structure may separately state its charges for installation and tangible personal
property and remains a construction contract for sales tax purposes. The fact that such
charges are separately stated in the contract or on the billing does not change the tax
consequences of the transaction. Additionally, since the contractor is not acting as a
retailer of tangible personal property, no tax is due on delivery charges.
If subcontractors are utilized and are acting as construction contractors, the
transaction between the general contractors and the subcontractors is not a taxable
transaction. The subcontractors incur Use Tax liability on any tangible personal property
that they purchase for incorporation into real estate. If, however, general contractors make
the purchases and then contracts to have subcontractors do the installation, the general
contractors incur Use Tax liability because they are making the purchases of such tangible
personal property.

COMPANY1/NAME
Page 5
October 15, 2024
I hope this information is helpful. If you require additional information, please visit
our website at https://tax.illinois.gov/ or contact the Department’s Taxpayer Information
Division at (217) 782-3336.
Very truly yours,

Thomas Grudichak
Associate Counsel
TG:se